What Is a Non-Compete Agreement?

A non-compete agreement is a contract where an employee promises not to enter into competition of any kind with an employer after the employment period is over. These agreements also prohibit the employee from revealing proprietary information or secrets to any other parties during or after employment.

Most contracts specify a certain length of time during which the employee is barred from working with a competitor after he or she ends employment with the employer.

Employers may require employees to sign non-compete agreements to keep their place in the market. Those required to sign these agreements may include employees, contractors, and consultants.

Understanding Non-Compete Agreements

Non-compete agreements are signed when the relationship between employer and employee begins. They give the employer control over certain actions of the former employee even after that relationship ends.

These agreements have specific clauses stating the employee will not work for a competitor after his or her employment is over, regardless of whether the employee is terminated or resigns. Employees are also prevented from working for a competitor even if the new job wouldn't involve the disclosure of trade secrets. 

Some of the terms of the contract may include the length of time the employee is bound to the non-compete agreement, the geographic location, and/or market. These agreements may also be called a "covenant not to compete" or a "restrictive covenant."

Non-competes should be designed to keep the best interests of the employer and the employee in mind.

Non-competes ensure the employee will not use information learned during employment to start a business and compete with the employer once employment is over. It also ensures the employer keeps its place in the market.

Industries that Use Non-Compete Agreements

Non-compete agreements are common in the media. A television station may have legitimate concerns that a popular meteorologist may siphon viewers away if she began working for a rival station in the same area. In most jurisdictions, this would be considered reasonable cause to sign a non-compete agreement.

Non-competes are also common in the information technology (IT) sector, where employees are often charged with proprietary information that may be deemed valuable to a company. Other places where these agreements are found include the financial industry, the corporate world, and manufacturing.

Key Takeaways

  • A non-compete agreement is a contract where an employee promises not to compete with an employer in any way after the employment period is over.
  • Under the agreement, the employee must not reveal any trade secrets learned during employment.
  • These contracts outline how long the employee must refrain from working with a competitor, the geographic location, and/or the market.

Legalities of Non-Compete Agreements

In the U.S., the legal status of non-compete agreements is a matter of state jurisdiction. States vary widely in their enforcement and recognition of non-compete agreements, and many state legislatures have undertaken recent debates and updated legislation related to non-compete agreements.

Non-compete agreements cannot be enforced in North Dakota and Oklahoma. California does not recognize non-compete agreements at all, and an employer who binds an employee to one after employment is over can be sued. Hawaii banned non-competes for high-tech companies in 2015. In 2016, Utah changed legislation, limiting new non-compete agreements to only a year.

Most states adopt some sort of standard that a non-compete agreement must not be egregious in length of time or geographic scope, and shouldn't meaningfully restrict a worker's ability to find employment. However, jurisdictions differ widely in interpreting what terms of a non-compete agreement would be overly onerous.

Non-Compete vs. Non-Disclosure Agreements

Non-compete agreements are distinct from non-disclosure agreements (NDAs), which generally don't prevent an employee from working for a competitor. Instead, NDAs prevent the employee from revealing information the employer considers to be proprietary or confidential, such as client lists, underlying technology, or information about products in development.